Shares In Public Vs. Private Companies: Key Differences For Investors

In Short

• Company Types: Public companies can raise funds from the public through share offerings; private companies have restrictions on public share offerings and a limited number of shareholders. ​

• Regulatory Obligations: Public companies face stringent reporting and governance requirements, including annual financial reports and independent audits; private companies have fewer regulatory burdens.

• Share Liquidity: Shares in listed public companies are highly liquid, traded on stock exchanges; unlisted public and private company shares are less liquid, with limited trading options.

Tips for Businesses

When deciding between public and private company structures, consider factors like capital-raising needs, regulatory compliance capacity, and desired control levels. Public companies can access broader capital markets but face increased regulations and potential loss of control. Private companies offer more control and fewer regulations but have limited access to public funding.

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Table of Contents

• Public and Private Companies: An Overview
• Advantages and Disadvantages
• Key Takeaways
• Frequently Asked Questions

As an investor, understanding the key differences between shares in public versus private companies will significantly impact your ability to manage risk and realise returns on your investments. This article aims to:

• provide a brief overview of public and private companies; and
• against that background, highlight three key distinctions between investing in shares in public versus private companies to enable investors to make more informed and robust decisions.

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Public and Private Companies: An Overview

Companies in Australia can be public or private, with public companies further divided into listed and unlisted entities. The key distinctions are as follows:

• Public Listed Companies: These companies have undertaken an Initial Public Offering (IPO), which is the process of offering shares to the public for the first time on a stock exchange such as the Australian Securities Exchange. After the IPO, their shares are publicly traded on the exchange.
• Public Unlisted Companies: While these companies are still considered ‘public’ and can have more than 50 non-employee shareholders, their shares are not traded on a public stock exchange. They may offer shares to the public through other means, such as a prospectus, but do not have the same level of liquidity as listed companies.
• Private Companies: These are typically smaller entities with restrictions on public share offerings and the number of shareholders (limited to 50 non-employee shareholders). They cannot offer shares to the public and are not listed on a stock exchange.

This public and private distinction significantly impacts the investment landscape, resulting in the following three crucial differences between investing in shares in a public company and shares in a private company: 

• liquidity; 
• valuation and pricing transparency; and 
• share structure, ownership and voting rights.

Liquidity

Liquidity varies significantly across different types of company shares:

• Listed Public Company Shares: These are highly liquid, as they can be easily bought and sold on public stock exchanges like the ASX. Accordingly, you can typically sell your shares relatively quickly when you need to exit your investment, with real-time pricing and immediate execution during trading hours.
• Unlisted Public Company Shares: While more liquid than private company shares, they are less liquid than listed shares. There is no public exchange for trading, but these companies can have a more extensive shareholder base than private companies. Selling may require finding a willing buyer through private transactions or waiting for the company to list or be acquired. 
• Private Company Shares: These are generally the least liquid. There is no public market for trading these shares, and the number of potential buyers is limited. Consequently, selling private company shares can be challenging and time-consuming. You would either need a willing buyer, or you would have to wait for an exit event such as an IPO or acquisition.

Transparency: Valuation and Pricing 

Public Companies: Transparency and Market-Driven Valuation

Valuation and transparency differ between listed and unlisted public companies:

1. Listed Public Companies

Companies listed on stock exchanges are subject to market forces that significantly impact their valuations. These valuations are shaped by a combination of factors, including:

• the company’s financial performance;
• future growth prospects, industry trends; and
• overall market sentiment.

Listed public companies offer high transparency. They are legally obligated to provide regular updates through continuous disclosure regimes, which include detailed financial reports, operational updates and announcements of material events. This steady flow of information allows for real-time valuation adjustments. The most commonly used metric for listed public company valuation is the equity market capitalisation, which is an approximation of the market value calculated by multiplying the total number of ordinary securities by the current share price. Hence, it is relatively more straightforward for investors to assess the current value of their shareholdings in listed companies.

2. Unlisted Public Companies.

While unlisted public companies are still required to maintain a higher level of transparency than private companies, they are not subject to the same continuous disclosure requirements as listed entities. They must provide annual financial reports to shareholders and notify ASIC of specific changes, but the frequency and depth of disclosures are generally less than for listed companies. 

Valuation of unlisted public companies is more challenging due to the absence of a public trading market. While they may use similar valuation metrics (such as price-to-earnings ratios or discounted cash flow analysis), the lack of real-time market pricing makes valuations less dynamic and potentially less accurate. Investors often rely more heavily on periodic financial reports and company-provided information to assess the value of their shareholdings.

Private Companies: Discretion and Negotiated Valuations 

Private companies, in contrast, operate with greater discretion when it comes to financial disclosure. Their shares are not traded on public exchanges, so there’s no readily available market price. This lack of public trading makes private company valuations more opaque and complex. 

Without the constraints of public market perceptions, private company valuations rely more heavily on in-depth financial and strategic analysis. Key considerations include:

• the company’s growth trajectory; 
• profitability; and 
• how it compares to similar businesses in the relevant industry. 

Share Structure, Ownership and Voting Rights

In terms of corporate governance, public (both listed and unlisted) and private companies exhibit distinct characteristics in their share structures, ownership patterns, and voting rights.

1. Listed Public Companies

Listed public companies typically have simpler share structures, often with a single class of ordinary shares carrying equal rights. Some may issue preference shares with clearly defined terms in their constitution. Ownership is widely distributed among numerous shareholders, including institutional and retail investors. Substantial holdings are subject to public disclosure requirements. Voting rights generally follow the “one share, one vote” principle.

However, the influence of individual small shareholders is often limited due to dispersed ownership. These companies are subject to stock exchange listing rules and regulatory oversight, ensuring high levels of transparency and governance.

2. Unlisted Public Companies

Unlisted public companies occupy a middle ground in terms of complexity. They can have more intricate share structures than listed companies but are generally simpler than private companies. Their ownership is less dispersed than listed companies but more diverse than private entities. While not subject to the same level of public disclosure requirements as listed companies, they still maintain higher transparency than private companies.

Voting rights can be more varied, potentially including different voting rights for different share classes. Shareholder influence may be more pronounced than listed companies due to a smaller shareholder base, allowing for more direct engagement.

3. Private Companies

Private companies can implement the most complex share structures, with multiple classes carrying different rights and preferences tailored to various stakeholder needs. Ownership tends to be concentrated among founders, early employees, and select investors, with changes occurring less frequently and often tied to specific events like funding rounds.

Voting rights can be highly nuanced, potentially including enhanced voting shares for founders, class-specific approval requirements, or veto rights for certain shareholders. This flexibility allows for more customised corporate governance arrangements but also introduces complexity that requires careful consideration by investors.

Advantages and Disadvantages

The factors influencing a decision to invest in public or private companies are not binary but rather details that require careful and holistic consideration.

Public Company Shares

Investing in listed public company shares offers distinct advantages, such as high liquidity, which enables easy buying and selling on stock exchanges, transparent pricing driven by market forces, and access to comprehensive financial disclosures mandated by regulatory bodies. These factors allow for informed decision-making and portfolio flexibility.

However, listed public investments can be subject to short-term market volatility, potentially higher valuations due to market hype, and limited individual investor influence on company decisions.

Unlisted Public Company Shares

Unlisted public company shares present a middle ground. They offer greater liquidity than private companies but less than listed entities. Transparency is higher than that of private companies due to regulatory requirements, but it is lower than that of listed companies. Valuations may be more stable than listed companies, and less affected by short-term market sentiment.

However, share prices are less readily available, and investments may be more complicated to exit than with listed companies. Unlisted public companies may offer more opportunities for investor influence than listed companies but less than private entities.

Private Company Shares

Conversely, private company shares present opportunities for potentially higher returns, especially in early-stage startups, and can offer investors more significant influence over company direction, particularly with larger stakes. Private investments may also benefit from more stable valuations that are less affected by short-term market sentiment. However, at the same time, private shares come with notable drawbacks, including: 

• general illiquidity;
• making it challenging to exit investments quickly; and
• less transparency due to reduced disclosure requirements and often higher minimum investment thresholds. 

Additionally, private investments typically require a longer time horizon and carry a higher risk of total loss, especially in startup ventures. 

Key Takeaways

The choice between listed public, unlisted public, and private investments ultimately depends on an investor’s risk tolerance, investment goals, available capital, and desired level of involvement in the company’s affairs. Nonetheless, a strong understanding of investing in shares in public versus private companies provides a strong foundation for doing so.

If you have any further questions regarding shares, our experienced business lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.

Frequently Asked Questions

How are shares in public companies valued?

Shares in listed public companies are valued based on market forces, with prices determined by stock exchange trading. Unlisted public companies’ valuations are less frequent, relying on periodic reports and financial data. Private company shares are valued through private negotiations, often during funding rounds.

What are the risks of investing in private company shares?

Private company shares carry risks such as illiquidity, limited transparency, and a higher potential for loss, particularly in early-stage companies. They also typically require a longer investment horizon.